FX Market Update 21st October 2010

The pound has slumped to a daily low of 1.1226 against the Euro. This break through technical resistance could see further declines from here towards the next level of support between 1.10 and 1.0950. It is remarkable how quickly the Euro has strengthened against both the pound and the USD and it looks set to stay that way for the near term. This is largely due to the expected QE coming from the UK and US in the next few weeks. All of the recent economic reports and speakers from the MPC and Fed indicate that this is required to avoid putting their fragile economic recoverys back into another recessionary period.

Stock markets have rallied today in both the US and Europe. This can be attributed to positive news from the US showing that the current recovery in the US should extend into 2011. The data points towards a sustainable economic recovery albeit a modest one even though the labour market is still not showing any sign of recovery. The S&P 500 index has rallied 3.2% in the first 20 days of this month on speculation that the Fed will pump cash in to help the economic recovery. It is unlikely that QE stimulus won’t be used but if it turns out that the decision is against QE we would expect to see a rapid decline in the stock markets globally.

Tomorrow looks set to be a relatively quiet day on the economic data front. Stock markets will probably continue to trend higher. Cable looks like it may trend lower however the daily technical trend is still positive so we could see a correction towards the 1.60 mark.